Following the reform of the off-payroll rules in April 2021, your end client will now have to determine your IR35 status, unless they class as a small private company. However, it's still important that you understand the factors that affect your status, so you can make sure you look and operate like a truly independent contractor, and give yourself the best possible chance of being assessed as outside IR35.
Why IR35 determinations are complex
There is no statutory definition of either employment or self-employment, which means IR35 decisions have to be based on case law and are often far from being clear or simple. There are many factors that can influence a status decision, and HMRC and the courts often have different opinions about which factors are most important.
Looking at the whole picture
Your IR35 status is affected by the written contract, but it’s also important to look at the reality of your relationship with the client. Where the two don’t match, the day to day reality will take precedence over what the contract says.
Which factors are most important?
It’s important to realise that not all factors have the same effect on your IR35 status. For example, while having more than one client and your own business email address may help to establish that you’re in business on your own account, they won’t help if you also report to a line manager at the client who can redeploy you as priorities change.
Key factors
These are important tests for employment that are likely to feature in any IR35 determination and have a significant effect on whether you’re considered to be inside or outside IR35.
Control
An employee would usually be under the supervision, direction and control of their employer. As you are an independent contractor, your end client should have less control.
This test will look at the extent to which the end client controls what work you do, how you do it, and when and where you complete the work.
Personal service or substitution
An employee provides their personal services to their employer, while a business provides services to the client, rather than a particular individual’s time. This test looks at whether you are required to complete the work yourself (personal service), or whether you have the right to provide a substitute.
In order to carry any weight, the right to supply a substitute must be genuine. If you wouldn’t be able to supply a substitute in practice, having the theoretical right written in the contract will not help. You should be able to show how a substitute could be used in practice.
Obviously, you’ll have a stronger case if you’ve used a substitute during an assignment, but failing that, an “unfettered” right of substitution, meaning the client must accept a substitute if you are not available, is a strong indication that you’re outside IR35.
Mutuality of obligation (MOO)
Every contract contains some level of mutuality. The question this test asks is whether the mutuality in your relationship with your end client is enough to indicate a master-servant relationship, which would point to employment.
There is some controversy about this test, because HMRC prefers a different interpretation to the one the courts use, and believe that MOO exists in every contract. This has led to them losing a number of high-profile cases
MOO exists if: | MOO does not exist if: |
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Supporting factors
These are factors that can strengthen or weaken your case that you’re outside IR35, but will not outweigh the key tests. You shouldn’t rely on these factors to establish an outside status, but they can be used to support your position.
Basis of payment
If you’re paid by the job rather than an hourly or daily rate this can indicate that you’re outside IR35.
Part and Parcel
Behaving as if you’re part of your client’s organisation can indicate that you’re inside. For example, do you use staff facilities, attend staff meetings and social events or receive staff benefits?
Exclusive service
Working for several clients can be an indication that you’re running an independent business.
In business on your own account
Do you operate as if you’re running your own business? Indications can include:
Your company has income from non-contracting sources
You have a company website and email address
You supply your own equipment
Your company is registered for VAT
Your company has invested in your training and development
Your company invests in marketing and you regularly tender for contract work
If you have any questions or if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com.